I had the same question. After researching a little, it seems this is how it works:
The iMac must be booted up, when you connect another computer (MUST be output from a Mini Displayport) to the iMac, it automatically switches to output mode.

In other words, there are no preference pane options. You can only enable it by plugging in the Mini, and it does not work with adapters (like DVI -> Mini Displayport). The cable is not included with either machine and cost probably $20 in store. I would search MonoPrice before buying.

Hope that helps.
MonoPrice Displayport Cables
EDIT: Actually might work with regular Displayports. Obviously, Apple wants you to use it with only their products, which is smart.

If I buy an iMac, will it be possible to hook my mini on it and select which computer will be on the screen (with some sort of source button), compared to having another a second monitor ?

No, the iMac has no "Display Input" socket.

You can use the iMac's screen to extend the desktop of another Mac using ScreenRecycler, but the other Mac would have to have a desktop to extend. If a screen isn't connected to the Mini, then this won't be the case._________________Intel Mini 2.0GHz C2D (4GB/120GB/SuperDrive/10.5.8 ), 120GB WD Passport, Logitech ergo k/b
iPod Touch (32GB, 3rd gen), iPod Shuffle (512MB, 1st gen)

You guys must have missed this new feature. The new iMac works as an external monitor when connected directly with a Displayport.
iMac Features

Quote:

Mini DisplayPort.
The Mini DisplayPort lets you connect an external display, including the Apple LED Cinema Display, to your iMac. On the 27-inch iMac, the same port offers input, too. So you can connect any external source that has DisplayPort output — including a MacBook or MacBook Pro — and use your iMac as a display.

Near the bottom where it explains the ports, it says the 27 inch can be used as an external monitor for another Mac computer.

yes mine is the older iMac and my mini is in another room so wouldn't help me anyway. but definitely of use to the OP. I'm not sure how easy it is to swap between systems if your using it as a secondary input though. With screen sharing method its running in a window within the imac so effectively both systems are running simultaneously on the same system._________________Phil

I have 4 PC's connected to my Keyboard Mouse and Monitor at work and I have a similar setup at home with my old Windows PC and Laptop. I just use the key combo CTRL ALT 1-4 to select the system I want to use_________________Phil

If I buy an iMac, will it be possible to hook my mini on it and select which computer will be on the screen (with some sort of source button), compared to having another a second monitor ?

No, the iMac has no "Display Input" socket.

You can use the iMac's screen to extend the desktop of another Mac using ScreenRecycler, but the other Mac would have to have a desktop to extend. If a screen isn't connected to the Mini, then this won't be the case.